‘Don’t take the week off’

Commentary: Slothower urges buying into market manipulation

By

PeterBrimelow

NEW YORK (MarketWatch) — An advisor who dodged the Crash of 2008 warns: Don’t take this week off!

The Crash year of 2008 was stunningly successful for Dennis Slothower. Three letters associated with him — Stealth Stocks, Stealth Stocks Daily Alert, and On the Money, his mutual fund service — were among the very few services that made money. (See Dec. 4, 2008, column.)

OK, the cynical readers who make nasty comments on my columns will claim that some of that fortunate few were stopped clocks. But that’s not true with Slothower. His services have a serious record extending over several years.

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For example, Stealth Stocks is up a solid 2.7% annualized over the nine (very rough) years it has been followed by the Hulbert Financial Digest, compared to 1.9% annualized for the dividend-reinvested Wilshire 5000 Total Stock Market Index. But over the over the last five (even rougher) years, it is up 4.6% annualized vs. negative 0.5% for the total return Wilshire 5000.

This is a particularly striking performance because Slothower has been mostly in cash for the last two years. (But he’s not a permabear — he experimented with bullishness in mid-2009. See Mark Hulbert’s Aug. 11, 2009, column.)

Slothower’s market timing system is highly technical. For example, his Daily Alert last Friday cited the Volatility Index (VIX), the McClellan Oscillator and the McClellan Summation Index, and also Bollinger bands, as well as a possible Bullish Descending Triangle.

But what really distinguishes Slothower is his ferocious, fundamentalist conviction that the stock market, and ultimately the economy, is being manipulated by the Federal Reserve in alliance with what he calls the “primary dealers.” It’s almost an equity version of Bill Murphy’s gold-oriented Lemetroplecafe Web site. (See April 19 column.) But the two editors don’t seem to be aware of each other.

Slothower wrote earlier this month: “When the Fed pumped up its POMO [permanent open market operations] in the first three months of the year, stocks rallied 5% for [the first quarter of 2010]. When the public became bullish in April, the Fed stopped its POMO and, over the next several months, stocks fell. The stock market saw its first “flash crash” in May 2010, falling close to 10% in less than 20 minutes. While everyone was trying to figure out what had happened, primary dealers made a fortune as they shorted the market. The stock market fell nearly 20% from the highs of April to the lows of August, when no POMO was provided.”

“You clearly see where I am going with this. Is this a market that looks like it’s being manipulated?

“Sure does to me. But instead of crying about it, we can follow the same data that the primary dealers have and plan our strategy accordingly.”

On Friday, Slothower declined to turn bearish (which for him means going short). After reviewing his technical indicators, he wrote: “While these charts and others that we could discuss clearly show risk of a trend reversal, it by no means is a certainty. As I have said many times, when the Fed aggressively intervenes with any variety of stimulus measures that find their way into the equity market, it simply doesn’t matter what any technical or fundamental indicators or data may suggest.”

“September and October are clear evidence of the power of intervention to drive prices continually upward in strongly overbought conditions. Though it is not a normal psychological nature of the market to do this, when the Fed exerts enough influence, prices reflect that intervention, regardless of what one might think of technical patterns or indicators.”

“Such is where we are at, entering what is possibly the most important week of the year. After the elections are over on Tuesday and the Fed declares their intents for quantitative easing on Wednesday, the die will likely be set for the direction of prices for the remainder of the year.”

Slothower thinks that, because of rising commodity prices, “once the midterm elections are past us, I believe the Fed will stop its POMO campaign, and when they do, expect another whipsaw back down to follow.”

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